29 Jun Question Problem 11-23Context-sensitive nature of cost
Question
Problem 11-23Context-sensitive nature of cost behavior classifications
Pacific Bank’s start-up division establishes new branch banks. Each branch opens with three tellers. Total teller cost per branch is $90,000 per year. The three tellers combined can process up to 90,000 customer transactions per year. IF a branch does not attain a volume of at least 60,000 transactions during its first year of operations, it is closed. If the demand for services exceeds 90,000 transactions, and additional teller is hired, and the branch is transferred from the start-up division to regular operations.
Required
a. What is the relevant range of activity for new branch banks?
b. Determine the amount of teller cost in total and the teller cost per transaction for
branch that processes, 60,000, 70,000, 80,000, or 90,000 transactions. In this case (the
activity base is the number of transactions for a specific branch), is the teller cost a
fixed or a variable cost?
c. Determine the amount of teller cost in total and the teller cost per branch for Pacific
Bank, assuming that the start-up division operates 10, 15, 20, or 25 branches. In this
case (the activity base is the number of branches), is the teller cost a fixed or a variable
cost?
Problem 12-15Selecting an appropriate cost driver (What is the base?)
The Vest School of Vocational Technology has organized the school training programs into three departments. Each department provides training in a different area as follow: nursing assistant, dental hygiene, and office technology. The school’s owner, Wilma Vest, wants to know how much it costs to operate each of the three departments. To accumulate the total cost for each department, the accountant has identified several indirect costs that must be allocated to each. These costs are $10,080 of telephone expense, $2,016 of supplies expense, $720,000 of office rent, $144,000 of janitorial services, and $150,000 of salary paid to the dean of students. To provide a reasonably accurate allocation of costs, the accountant has identified several possible cost drivers. These drivers and their association with each department follow.
Cost Driver
Department 1
Department 2
Department 3
Number of telephones
28
32
52
Number of Faculty members
20
16
12
Square footage of office space
28,800
16,800
12,000
Number of secretaries
2
2
2
a. Identify the appropriate cost objects.
b. Identify the appropriate cost driver for each indirect cost and compute the allocation
rate for assigning each indirect cost to the cost objects.
c. Determine the amount of telephone expense that should be allocated to each of the
three departments.
d. Determine the amount of supplies expense that should be allocated to Department 3.
e. Determine the amount of office rent that should be allocated to Department 2.
f. Determine the amount of janitorial services cost that should be allocated to Department
1.
g. Identify two cost drivers not listed here that could be used to allocate the cost of the
Dean’s salary to the three departments.
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